Monterey County and California American Water have reached a deal on the failed regional desalination project that includes cooperation on Cal Am's new water supply proposal for the Peninsula.

The agreement comes a week before critical hearings on the new project.

The settlement agreement, signed by county officials Tuesday, allows the county to recoup most of its estimated $4 million investment in the failed project in exchange for agreeing not to enforce its ordinance on public desal ownership against the new proposal. The $400 million project calls for a Cal Am-owned desal plant north of Marina.

As part of the deal, Cal Am will forgive the $1.92 million it advanced the county's Water Resources Agency for the failed project and will reimburse the county about $1.48 million more.

In response, the county will drop its pending lawsuit against Cal Am in San Francisco County Superior Court that sought a ruling on whether the county's public ownership rule applied to the new project.

The cost reimbursement excludes any pre-2009 expenses and any legal costs associated with an alleged conflict of interest involving former county water board member Steve Collins.

In addition, the county agrees to support the new project before the state Public Utilities Commission and other regulatory agencies, while Cal Am agrees to support a public governance proposal from the Peninsula regional water authority. The authority, which is made up of Peninsula city officials, is calling for a three-person project advisory committee that would have varying degrees of oversight on virtually every aspect of the project.

Cal Am also agrees it will attempt to limit its draw of desal source water to the shallow part of the Salinas Valley aquifer, a key priority of farming interests, and pay for a groundwater monitoring program to be created by the county water agency.

The Peninsula is facing a state-ordered cutback in pumping from the Carmel River that takes full effect at the end of 2016, and needs a replacement source.

Praise for agreement

County Counsel Charles McKee, who led the negotiations, said the county established a "very advantageous position" with the settlement, retrieving the bulk of its regional project costs while preserving its oversight authority — with the exception of the public ownership rule, which he said might not have been enforceable against Cal Am.

"I think it's a very positive agreement for the county and the Water Resources Agency," McKee said. "There's support (for the new desal proposal), but there are limits to the support."

County Supervisors Simon Salinas and Dave Potter praised the agreement in a statement as part of a news release issued by Cal Am on Tuesday. Salinas lauded the reimbursement of county funds, and Potter noted the importance of Cal Am agreeing to back the regional water authority's public oversight plan.

Cal Am President Rob MacLean touted the agreement as a way to move forward with a new Peninsula water supply.

"We're pleased to be able to put these disputed items behind us," MacLean said in the statement. "We can now concentrate on the work at hand, which is to provide a new, long-term, reliable source of potable water for our customers on the Monterey Peninsula."

Supervisor Jane Parker said she still has concerns about the lack of public ownership of the desal plant and about Cal Am's willingness to cooperate with the regional water authority on public oversight, suggesting the authority hasn't been assertive enough with its proposal.

Cal Am spokeswoman Catherine Bowie said the company is supporting its own, revised version of the authority's oversight proposal.

David Chardavoyne, general manager of the county water agency, said in the statement that the "robust" groundwater monitoring program would play a key part in "protecting the health" of the Salinas Valley water basin.

Ownership rule not dead

The agreement calls for Cal Am to seek PUC approval for the agreement, including permission to recover the payment to the county from water customers in its Monterey district. The company has already been authorized by the PUC to recover about $32 million in project costs from its local customers.

McKee said the county will continue to seek a rehearing on a PUC decision regarding the public ownership ordinance in an attempt to preserve the rule and oversight of any other desal proposals. The PUC has ruled that the ordinance is pre-empted by the commission's authority over Cal Am.

McKee said the county continues to support the "concept" of public desal ownership, though he added there's a recognition that Cal Am should take the lead on its proposed desal plant. He said the regional water authority's public governance proposal will play a "very important" role in the project oversight.

Cal Am and the county have been negotiating for months over how to resolve the remaining issues on the failed desal proposal, including millions of dollars in outstanding bills. The regional project, in which Cal Am and the county were partners with the Marina Coast Water District, fell apart amid Collins' alleged conflict of interest and environmental litigation issues.

Marina Coast, which has insisted the regional project agreements are still valid and estimates it has spent about $10 million on the proposal, is not included in the settlement agreement. Neither county nor Cal Am officials would discuss the status of any discussions with the district. District officials are also seeking a rehearing of the PUC's pre-emption decision.

The PUC will host a cost workshop on the new desal project Tuesday through Thursday next week, and a prehearing conference on that Thursday, at its headquarters in San Francisco.